Abstract
The paper shows how the standard two-period CAPM with exogenous wealth and exogenous returns can be extended inter-temporally by including the evolution of wealth from the Evolutionary Finance model of Evstigneev et al., J Math Finance 12:329–339, (2011). The missing link between the two models is the CAPM with heterogeneous behavior derived by Hens and Naebi, J Appl Econ Lett 28:501–507, (2020). The paper delivers theoretical and empirical results for behavioral heterogeneity in the CAPM with evolutionary dynamics. The market selection process results in a beta based on fundamentals to which the standard beta tends to converge asymptotically. The results of our model are confirmed by data from the DJIA.
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